Frank Burch

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    • Tue May 13th 18:36 PM | Rating: 0 0
      Commented on:
      Nortel's Q1 Results: Understanding Deferred Revenue
      The joint venture revenue was also deferred revenue..the gist is that people don't want to recognize joint venture revenue or deferred revenue...in this case it was joint venture deferred revenue. I guess the point is that NT HAS to recognize the revenue and earnings sometime...why not?
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    • Wed Mar 5th 18:27 PM | Rating: 0 0
      Commented on:
      What is Nortel’s Investment Thesis?
      Sramana- NTs investment thesis was well articulated at its fireside chat in november...check out the presentation either on their site or from IR...you have to try read about it....it's easy to crap on NT.

      other thoughts:WHY INVESTORS SHOULD PILE INTO Nortel NOW



      1. You have skipped the first 2 years of a tough turnaround. The 3rd year is key…Jack Welch will tell you that.

      2. Much has been accomplished, despite stock selloff. Every operational metric is in better shape.

      3. Margin improvement was better at NT than at any competitor over the last year.

      4. Key investments have also been made. NT’s market cap about equals what it has spent in the last two years on R&D. This should bear fruit soon.

      5. Numerous potential catalysts.



      This story gets really good quickly, or someone acquires the Company and all associated revenue, intellectual property, a great North American installed base, a senior management team, AND they eliminate a competitor in the emerging enterprise business and other areas.



      For a strategic buyer, it is a no brainer. For CSCO in particular, it is a no brainer. This is not a large acquisition for them. They could pick the locales and employees they wish to retain and shutter the rest. With almost no NT R&D, they would make huge and immediate profits in the remaining businesses, and be able to keep those businesses competitive through ongoing CSCO R&D. Eliminating NT as a possible enterprise competitor forever is worth billions of loonies alone.



      A financial buyer also makes sense. Everything is working but the stock price. NT is set to be massively profitable, but the distraction to management and key employees of a diving stock price can hinder the underlying performance. As a private company, the proper cuts could be made…the Canadian press be damned. Certain operations could be sold off for quicker financial results. Management could also focus on bolt on acquisitions and such things rather than an embarrassing stock price decline.



      Activist investors could help facilitate quicker management action or a sale.



      The opportunity

      In short, NT management is managing the company for a long-term turnaround. They are making the tough decisions to build a “great company”. CEO Zafirovski said it would take 3 to 5 years…it looks like 4 to 5 years. Along the way a number of key changes have occurred which call into question this strategy. First, the telecom service providers have undergone a massive consolidation and new entrants have not materialized since the bubble of the late 1990’s. Second, a number of NT‘s competitors have merged (ALU) or formed joint ventures (Nokia-Siemens). Third, competition from Asian competitors has increased significantly particularly in the higher margin more technically challenging areas (WIMAX).



      Now 2 years into the turnaround and despite a tough environment much has been accomplished:



      1) The Businesss Transformation Plan has substantially reduced costs; improved NT’s market position in key product areas ; better aligned NT’s strengths with customers needs and focused R&D spending on growth technologies.

      2) The Q4 gross margin of 43.7% was the highest in five years.

      3) Operating Margins are up 350bps year over year.

      4) Zafirovski has replaced virtually the entire senior management team with seasoned executives with proven leadership and business skills.

      5) NT has resolved its legal and regulatory issues thus eliminating an important overhang and potential liability.

      6) NT has completed a complete overhaul of its finance department including the implementation of a world class IT reporting system from SAP.

      7) Cash flow from operations has steadily improved due to increased focus on working capital management and savings associated with the BT program.

      8) NT has successfully re-financed its outstanding debt maturities and does not need to raise capital to implement its turnaround. Net debt is under $1 billion and there are no significant debt maturities coming due.

      They have over $11 billion in Sales…could make $1.40 operating earnings next year. Stripped down, NT could make a lot more than that. NT spends $1.6 billion per year on R&D. That is $3.20 per share per year in R&D. R&D is important, but they are overspending in anticipation of being a 13% OM business. RIMM spends $250 million per year, for example, less than $0.50 per share which is 8% of revenues versus NT’s 14.8%

      NT has accomplished a lot, but not enough. If a turnaround stock remains stable or trends up, then a turnaround management team has the luxury of plugging along in their grand plan. But, NT’s stock price has been destroyed…down from $32 to 7.70 in 12 months. In this time, a lot at the Company has improved. Gross margin has been up in each of the last six quarters and is significantly better than its competitors.

      So progress has been made, but the market has pulled the rug out from under them. They are out of time. Now, they need to drastically increase their efforts to get dollars to the bottom line. They have lost the luxury of taking their time, and now are an easy target for CSCO and others.

      Their mistake… a little arrogance and small misses that hurt BIG

      After a good Q3 in terms of revenue and gross margin, management committed to meaningful opex improvement and mid single digit sales improvement. At the “fireside chat” in mid November, Zafirovski reiterated the guidance including the operating margin of high single digits. After decent top performance in Q4 from NT’s key competitors, investors had every reason to expect a strong Q4 with no surprises. Instead, NT missed guidance. They compounded the failure by not pre-releasing and thereby hanging key analysts out to dry.

      The extreme market reaction demonstrates the loss of confidence and management lack of understanding regarding the patience of the investor base. You can spend $1.6 billion in R&D and go on your merry way of restructuring…buy you have to show broad, consistent improvement.



      In particular, they have been slow to cut costs in the finance area so as to be conservative and extra cautious with their accounting. Now, with the 3rd closing of the books under the newly installed SAP system, we hear that an easy $200 million can come out of the finance area alone. The company must also start to show fruit for its expensive R&D efforts or do a better job of explaining how $1 invested in R&D yields a consistent $0.13 operating profit. In short, NT must prove that it can and will be paid by customers for its efforts

      With any progress at all, NT will have $11.3 billion in revenue this year and close to $12 billion in 2009 with new products from R&D coming online strong. $12 Billion multiplied by a 13% operating margin yields a $3.12 per share run rate exiting 2009.

      Valuation ridiculously low by any measure versus peers

      In this analysis, I use price to sales, because we know that by the right cuts, NT can easily get to industry profit margins. NT will get to 13% operating margin by 2009…or sooner if they get more aggressive. The last quarter WAS 7.41%, up 340 basis points year over year..

      So, to summarize, why get involved?

      1. Underlying business value when restructuring and R&D yield 13% om

      2. Strong acquisition potential

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